Monday, 30 September 2013

Oligopoly and pricing power

Excuse another random quote from a book about corporate governance and power, but I thought this was pretty relevant given the discussion about Labour's proposed energy bill cap. (It's from this).
Although technical monopoly may be a rarity, markets are commonly dominated by a small number of large producers. In such circumstances by colluding or in virtue of the structural properties of oligopolistic markets, companies are able to obtain variable degrees of protection from competitive pressures. In addition to the relatively small number of producers, other requirements for perfect competition are also unlikely to be met in practice. Thus an uncompetitive market structure may be maintained indefinitely because of barriers to entry and exit; products are not, as in the model, homogeneous but have differentiating characteristics which enable producers to raise prices without causing a total shift in demand to their rivals; and finally, purchasers lack perfect information and hence may pay higher prices than they would if aware of alternative, cheaper sources of supply. The effect of these various imperfections is to cede to companies a zone of discretion in relation to products and prices and the wide range of factors connected with the production process.
This is a mid-90s take, so things have changed. Two quick thoughts on how. First, consumers now have access to much more information, and much more easily (eg price comparison websites) which tilts the balance in their favour. However, we also know more about actual consumer behaviour, and a behavioural economics take on such issues tells us that even with better information and enhanced choice consumers might still not exert much pressure on suppliers (because of inertia, overwhelmed by choice etc).     

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